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Make Your Ranch Better, Before You Make It Bigger

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In ranch management, it’s frequently advised that ranchers get better before they get bigger. Unfortunately, it’s much easier to expand than get better.

In past cattle cycles, I felt it took average profits of over $200/cow to stimulate a full-blown beef herd expansion. So, what was the profit level of a typical 2011 beef cowherd? Let’s look at the 2011 average for 42 beef cowherds representing the western region of North Dakota.

These 2011 herds (Figure 1) averaged 165 cows and weaned an 87% calf crop based on females exposed, with a 528-lb. average weaning weight. These herds produced 457 lbs. of calf weaned per female exposed.

Calf death loss was 8.7%, which reflects a cold/wet 2011 calving season; normally it is 5% or less. The calculated weaned steer calf price was $163/cwt. Cull animal income generated 15% of total gross income for the beef cow profit center.

Figure 2 summarizes these herds’ economic performance. They grossed $946/cow, with total production costs of $796/cow, for an earned net income (return to labor, management and equity capital) of $150/cow. Annual feed costs were $299/cow, with winter feed costs averaging $177/cow and summer pasture $122/cow.

The biggest cost was $310/cow for replacement females and bulls. Based on past cattle cycles, I suggest the $150 bottom line isn’t sufficient to stimulate full-blown expansion.

The second column of Figure 2 is my current 2012 projected Eastern Wyoming/Western Nebraska beef cowherd budget compared to the North Dakota 2011 actual. The two primary differences are gross income generated by the fall 2012 projected higher calf prices, and the lower female and bull replacement costs I’m using in the 2012 projections.

The good news is that I project these ranchers will average or exceed the $200-profit threshold in 2012; that should stimulate national expansion. The last time earned net returns exceeded $200 was in 2005; at that time, ranchers launched a herd expansion that was ultimately aborted by the 2006 drought and then delayed permanently by the coming of biofuels.

North Dakota’s 2011 Farm Business Management Summary provides the economics of developing 2010 weaned heifer calves in 2011 (Figure 3). The average gross income reported for the 2011 heifer development profit center was $1,237/heifer developed. Development costs, including the initial opportunity cost of the weaned heifer, were $971/heifer, for an economic return of $266/heifer developed. In fact, the average bottom line for the heifer development profit center was higher than the average bottom line for the beef cow profit center.

For comparative purposes, Figure 4 presents the economics of developing 2009 weaned heifer calves. The bottom line on this profit center was $197 – again higher than the bottom line of the beef cow profit center. We now have two years behind us of profitable heifer development.

Heifer development proved to be profitable for developing 2009 and 2010 heifer calves, but what about future years? The tricky part of utilizing the beef price cycle is deciding when to expand. It’s all in the timing of not selling the heifer calves and the added heifer development costs vs. the beef price cycle.

Let’s examine this timing issue by expanding the 250-cow herd discussed in last month’s column. If I plan to expand from 250 cows to say 300 cows in 2012, I must hold back an additional 50 heifers in fall 2012. It will take until fall 2014 before I can sell any additional calves from these added replacement heifers.

To evaluate the economics of this expansion decision, let’s study the economics of this herd for the period of 2011-2020. As base-year data, I’ll use the averages from the 2011 North Dakota Farm Business Management Summary.

My first step is to simulate maintaining a perpetual 250-cow herd at 2011 herd performance parameters over that nine-year period. However, the economic parameters were changed annually for 2012 through 2020 based on my long-run economic projections. Some annual costs were inflated, while others were held constant. In addition, a calf price cycle was projected for the 10-year study period.

The red bars in Figure 5 summarize the study herd’s projected annual net incomes for the perpetual 250 bred cow control run. A substantial increase in net income is projected for years 2012 through 2014 with a gradual drop in annual net income through 2020. The accumulated 10-year net income totals $600,446. The highest annual net income was in 2012, and the second-highest was in 2013. This perpetual 250-cow herd simulation becomes the control run.

A second simulation was performed with 50 additional 2012 replacement heifers held back and developed. Additional grass was priced in at $122 for each added cow. This second simulation represents an expansion to 300 beef cows and the annual net incomes are represented by the green bars.

As you can see, the annual flow of net incomes changed substantially with my herd expansion. The net incomes for 2012 and 2013 were reduced by holding back an additional 50 heifers. The year of highest projected calf prices generated the lowest net income. Once these replacement heifers started producing calves in 2014, annual net incomes exceeded the control’s annual net income.

The accumulated 10-year net income generated by the 50-head expansion was only $6,340 higher than the control run. This works out to average an additional $634/year in net income. My conclusion is that I’m not really interested in expanding my herd in 2012 after all.

In ranch management, it’s frequently advised that ranchers get better before they get bigger. Unfortunately, it’s much easier to expand than get better.

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or harlan.hughes@gte.net.

Discuss this Blog Entry 1

Jim McGrann (not verified)
on Jun 15, 2012

If you include labor and management cost (living\
withdrawals) and then calculate the ROA things don't look all that great.
Complete financial statements give a reality not shown in a partial cost approach.

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Harlan Hughes has spent a professional lifetime helping U.S. beef producers better manage the business end of their beef cow operations.

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Harlan Hughes

Harlan Hughes is a North Dakota State University professor emeritus and author of the monthly "Market Advisor" column that appears in BEEF magazine. He also consults and lectures widely,...

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